George Osborne must ease off on austerity to rescue growth and bring the
public finances under control, the International Monetary Fund warned as it
slashed its UK economic forecasts for both this year and next.

To combat slow growth, the IMF urged the Chancellor to consider more “flexibility” in his £130bn austerity programme.

Olivier Blanchard, the IMF’s chief economist, said the time had come for the Chancellor to adjust his £130bn package of tax rises and spending cuts, claiming that the country had the “fiscal space” to afford more stimulus.

Singling out the UK in answer to a question about the pace of austerity in the eurozone, he said: “There are a few countries where there is enough fiscal space to go further – one example is the UK. In the face of weak demand it is really time to consider an adjustment to the initial fiscal consolidation plans.”

It was the strongest statement yet from the Fund for the Chancellor to switch to Plan B.

The comments came as the IMF cut its UK growth forecast for both this year and next by 0.3pc – to just 0.7pc this year and 1.5pc in 2014. Although the IMF’s projection for global growth in 2013 was also weaker, at 3.3pc rather than 3.5pc, the UK suffered the sharpest downgrade of any advanced economy across the two years.

Britain’s recovery has stalled due to “lacklustre demand”, the IMF said, as “domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions, and economic uncertainty”. Weak demand from exports markets, particularly the eurozone, has also hampered growth, it said.

Although the IMF’s forecasts showed that Britain would grow faster than both Germany and France over the next two years, the unprecedented attack on the Chancellor’s strategy was pounced on by his critics.

Shadow Chancellor Ed Balls said: “It was a serious mistake for George Osborne to totally ignore the IMF’s calls for a reassessment of fiscal policy in the Budget. They are right to step up their warnings and insist that a change of economic policy is considered right now.”

In more measured words than those used by Mr Blanchard at the press conference, the IMF said in its World Economic Outlook that the Chancellor should consider “greater near-term flexibility in the path of fiscal adjustment ... in the light of lacklustre private demand”.

Mr Blanchard said the IMF would be discussing “with the UK authorities over the coming months what can be done”.

It was not the first time the IMF has pressed Mr Osborne to revise his plans, but was striking because the Chancellor had already responded by back-ending spending cuts and abandoning his golden rule on the national debt. The IMF acknowledged that “in the UK, fiscal consolidation is now forecast to be slower than was anticipated previously” but still demanded further easing.

The IMF also claimed the Bank of England could be doing more to help the recovery. Rather than use its £375bn of quantitative easing to buy solely government debt, other private sector assets could be purchased, the IMF said in its World Economic Outlook. Specific guidance on how long rates would be held at 0.5pc could also help ease financial conditions, it suggested.

“In the UK, other forms of monetary easing could be considered, including the purchase of private sector assets and greater transparency on the likely future monetary stance,” the IMF said.

Both policies have been anathema to Sir Mervyn King, the Bank’s outgoing Governor, who is dogmatically opposed to taking any risk on to the Bank’s balance sheet and has rejected the policy “guidance” approach taken by the US Federal Reserve and his successor Mark Carney at the Bank of Canada. The US has set an unemployment target and Mr Carney guaranteed rates would be rock bottom for a year.

The broader picture was one of global growth finally beginning to accelerate this year after “a weak start” and in 2014. Immediate risks have also “improved significantly”, largely due to efforts in the eurozone to stabilise the situation and in the US, where a plunge over the fiscal cliff has been averted.

But the euro could still pose a threat to the recovery and “other downside risks persist”.

One new threat comes from “adjustment fatigue or general policy backtracking” in countries where ongoing austerity is vital, such as the eurozone members. Longer-term, central banks may find it tricky to exit from quantitative easing. “In effect, central banks could face a difficult choice between exit that is associated with excessive inflation and exit that unsettles financial markets,” the IMF said.

The Prime Minister’s official spokesman said: “The IMF highlighting the global economic risks, principally linked to the eurozone, is of absolutely central importance. The report also says the adjustment undertaken in advanced economies over the last three years averages around 1pc of GDP and that seems about right to the IMF. The UK’s consolidation is in line with that.”

The Telegraph Investor

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